U.S. Chamber of Commerce

11/18/2022 | Press release | Distributed by Public on 11/18/2022 06:56

Economic Viewpoints

Updated periodically, Economic Viewpoints provides a snapshot of the U.S. economy from the Economic Policy Division at the U.S. Chamber of Commerce.

Consumers Keep Spending Faster than Inflation

November 17, 2022

Retail sales - spending at retail stores and bars and restaurants - rose a surprising 1.3% in October.

Why it matters: That exceeded inflation handily. Prices rose 0.4% in October, so inflation-adjusted retail sales rose a hardy 0.9%.

Be smart: Consumers are still spending even though inflation continues to drive prices higher, stretching budgets.

  • They can keep pace with inflation, even though their inflation-adjusted wages are falling by drawing down savings and using their credit cards, which they had paid down during the pandemic.

Looking ahead: How long this unique scenario can continue is hard to gauge.

  • Savings are not uniformly distributed, so we don't know if the people that have them are those that need them to support spending.
  • Similarly, we don't know if the rise in credit is concentrated among those that are the most leveraged.

Bottom line: The situation could reverse quickly, but for now consumers' surprising resilience is driving "second-hand pessimism," which is the divergence between how consumers and businesses tell surveys they feel about the economy (bad) and how they're acting (spending and investing).

Consumer Sentiment Falls

November 15, 2022

Consumer Sentiment fell sharply in November. It hit an all-time low in June and had risen four straight months since then, albeit modestly.

Why it matters: The pronounced drop in sentiment is surprising because inflation moderated in October. With inflation being the main concern for consumers it would follow that their mood would improve, but that hasn't happened.

Be smart: The economic data and behavior of consumers and businesses are not following expected patterns. Both consumers and businesses feel bad about the economy, yet consumers keep spending and businesses keep hiring, raising wages, and investing.

  • We've been calling this unique circumstance "second-hand pessimism " and consumers' dark turn this month continues the confusing pattern.

Looking ahead: Updated spending data, which we'll get later this week, will tell us more about whether this phenomenon continues, or whether spending is finally slowing to match the poor mood of consumers.

  • There has been no sign that's the case yet, so the confusing split between sentiment and actions is likely to continue. That would be good news for the economy because actions speak louder than words when it comes to growth.

Jobs Added in October, But Labor Force Declines

November 8, 2022

The economy added 261,000 jobs in October. Expectations were for about 200,000, so we exceeded them. That's the good news.

The bad news is that labor force participation is still lagging badly, even as we keep adding jobs and have so many unfilled positions.

  • The labor force shrunk by 22,000 in October. We are 84,000 above the pre-pandemic participation level, but the level has dropped for two straight months now.

Why it matters: If we had the same participation rate now as pre-pandemic, there would be 3.05 million more workers in the labor force.

Be smart: Also concerning is which survey in the jobs report to rely on. The 261,000 jobs gain comes from a survey of businesses. That's usually where we get the job creation number.

  • But the households survey showed employment down by 300,000. The surveys are pointing in different directions, which is unusual.

Other key data points:

  • Wages rose 0.4% from September and 4.7% annually from October 2021.
  • Education and health services added 79,000 jobs; professional business services 39,000; leisure and hospitality 35,000; manufacturing 32,000; and wholesale and retail trade 22,000.
  • No industries lost jobs, but mining and logging was unchanged.

Bottom line: Future revisions will shed more light. For now, it's best to be happy with the jobs added but not be overly optimistic about what it means for the economy's direction.

Job Openings Rose Again in September

November 3, 2022

Job openings were 10.7 million at the end of September. That is surprisingly up 437,000 from August when openings were 10.3 million.

Why it matters: The worker shortage is not easing; it is worsening. There are 5 million more job openings than unemployed workers.

  • The largest increases in job openings were in accommodation and food services (215,000); health care and social assistance (115,000); and transportation, warehousing, and utilities (111,000).
  • The number of job openings decreased in wholesale trade (104,000) and in finance and insurance (83,000).

Be smart: A cooling economy would ordinarily cause businesses to cut back on their job postings, as they did in August. But August's drop in postings is an outlier as openings rebounded in September.

Hiring and quits remained at roughly the same levels as in August. So businesses are still adding workers, and workers are still confident they can quit their current jobs and find better ones easily.

  • The quits rate was 2.7% in September. That is just below the all-time high rate of 3%.
  • 4.1 million people quit their jobs in September, down from the 4.45 million all-time high in March but still historically high.

Bottom Line: The still-strong labor market is a big part of the "second-hand pessimism" narrative of the current state of the economy. Businesses say the economy is poor, but they're still hiring as if it's strong.

Income and Spending Up in September

November 1, 2022

Income and spending rose more than inflation in September.

  • Income rose 0.4%, and wages and salaries rose 0.6%. Inflation was 0.3% in September, so both rose above still-high inflation.
  • Spending increased a strong 0.6%, or 0.3% after adjusting for inflation.

Why it matters: These are strong results and give another data point in favor of second-hand pessimism. The perception is that the economy is slowing (and it is), but consumers are still earning and spending. Their actions may keep the economy from a steeper decline.

Be smart: Spending growth (after accounting for inflation) outpaced inflation-adjusted income growth. It was able to do that because of accumulated savings.

  • Savings were positive in September but well below pre-pandemic levels. Consumers are spending down their pandemic savings accumulations to keep spending up.
  • At its peak, pandemic savings were approximately $2.7 trillion. That is now closer to $2.1 trillion. So they've spent roughly $600 billion of their savings this year to keep pace with inflation.
  • That amount will continue to dwindle as inflation remains high.

Bottom line: Consumers' savings could allow their spending to keep up with inflation and keep pessimism second-hand. But that won't last forever.

The Economy Grew 2.6% in Q3

October 27, 2022

The economy grew 2.6% in the 3rd quarter (July - September). We estimated growth of 2.1%, so the economy slightly outperformed our expectations.

Why it matters: The strong 3rd quarter means the description of the current economic situation as reflecting second-hand pessimism is still accurate.

  • Consumers and businesses feel bad about the economy when surveyed, but the underlying data, reflecting their actual spending activity, tell a more positive story.

Be smart: The strong growth in Q3 is a reversal from Q1 and Q2 when the economy contracted by 1.6% and 0.6% respectively.

  • If the first half of the year is declared a recession, the expansion in Q3 means it ended in July. (There is still a 50/50 chance of a recession going forward.)

By the numbers: Growth came from gains in personal spending, business investment, trade flows, and government spending:

  • Personal spending rose 1.4%. Spending on goods was down (autos were a big weight), but growth in services spending, particularly healthcare and "other" services, more than made up for that loss.
  • Residential investment, unsurprisingly, fell sharply by more than 26%. The housing market is slowing rapidly as interest rates rise.
  • Business investment was robust though, rising 3.7% on the back of spending on equipment and intellectual property.
  • Inventories fell as businesses continue to draw down their existing stocks and supply chain issues remain a problem.
  • Exports rose more than 14% and imports fell 7%, so net trade flows added substantially to growth in the quarter.
  • Government spending added to GDP as well, especially large increases in defense spending.

Housing Prices Fall in August

October 25, 2022

The latest data shows the housing market is struggling. Prices fell 1.1% nationwide in August.

  • On an annual basis, prices are still up 13% annually.
  • That is down from recent highs. They were up almost 16% annually in July and 21% annually earlier this year.

Why it matters: Housing prices are falling because interest rates are rising and cooling demand.

  • The National Association of Home Builders survey of homebuilders has fallen steeply in recent months, for instance, showing a substantial decline in demand for new homes.

Be smart: We are not in the same situation as we were in 2006 and 2007. Homeowners in general have much more equity than in that period and fewer of them have adjustable-rate mortgages.

Bottom line: The housing market is not as hot as it was a few months ago. That's bad news if you waited to sell until now, but it is not like the housing bubble in 2007.

Digging Deeper into Economic Pessimism

October 20, 2022

Second-hand pessimism is the developing watchword for our unique economic moment.

Why it matters: While consumers' and businesses' specific economic situations remain strong, they tell pollsters they feel pessimistic about the economy because there's a general sense it is weak.

Case in point: Consumer sentiment is near a record low, even while consumers continue to spend on pace with inflation.

And: Businesses of all sizes, sectors, and industries feel pessimistic about the future of the economy. Yet, according to the Conference Board's Survey of CEO Confidence:

  • 44% of CEOs expect to expand their workforce in the next 12 months
  • 85% expect to increase wages by 3% or more over the next year
  • 86% expect their capital budgets (amount to invest) to increase or remain the same over the next year

Be smart: These are not the actions one would expect when consumers and businesses tell surveyors the economy is bleak.

  • But: This doesn't mean the economy is doing great, or that there aren't risks going forward. The economy is doing all right but may very well weaken substantially in 2023.

Bottom line: Second-hand pessimism tells us that if and when the economy does soften, the downside might not be as painful as many fear.

Retail Sales Hold Steady with Inflation

October 18, 2022

Excluding volatile auto and gas sales, retail sales kept up with inflation in September.

Why it matters: This is good news. Consumer spending is keeping pace with inflation, even with economic sentiment sticking near record lows.

Big picture: This persistent strength in consumer spending is consistent with the emerging trend of "second-hand pessimism."

  • When asked about their personal economic situation, people and businesses report they are doing well, while they are more pessimistic about the broader economy.

Details:

  • Car sales remain volatile because auto companies are still unable to operate at full capacity due to ongoing supply shortages. Spending at gas stations fell because of further price decreases. Taking away these components shows retail sales rose at about the same rate as inflation.
  • Sales were up at food and beverage stores (0.4%), clothing and accessory stores (0.5%), general merchandise stores (0.7%), food and drinking places (0.5%), health and personal care stores (0.5%), and non-store retailers (0.5%).
  • Sales down at motor vehicles and parts dealers (0.4%), building material and garden supply stores (0.4%), sporting goods and hobby stores (0.7%), miscellaneous stores (2.5%), furniture stores (0.7%), electronics and appliance stores (0.8%), and gas stations (1.4%).

Bottom line: Even as the Fed hikes interest rates to fight inflation, consumer spending remains strong. It remains to be seen whether the strength of the consumer will help avoid the "hard landing" of a recession.

Read more from the Chamber:

About the authors

Curtis Dubay

Chief Economist, U.S Chamber of Commerce

Curtis Dubay is Chief Economist, Economic Policy Division at the U.S. Chamber of Commerce. He heads the Chamber's research on the U.S. and global economies.

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